Small savings lose sheen

NEW DELHI: The rise in deposit rates could hit an unintended target — small savings schemes. Another factor which will add charm to the good ’ld fixed deposits (FDs) is the finance ministry’s decision to provide tax sops on investments up to Rs 1 lakh for 5 years or more.

With deposit rates touching 8%, banks are expecting an exodus from small savings schemes to FDs.

The reason: while depositors could get the same return on FDs, the liquidity factor comes in as a much needed bonus. Banks are already reporting a significant rise in their FDs, which is coming back to the old proportion of 50% of the overall deposits of banks.

The finance ministry on Tuesday had announced tax breaks on FDs of 5 years and more on investments up to Rs 1 lakh. This will place FDs on par with schemes like the National Savings Certificate and the PPF in terms of tax sops.

The move will also help banks to strengthen their deposits base and lower their cost of funds. “The FD-deposit ratio had fallen by about 3% last year. This year, not only will the ratio come back to 54%, but will increase by another 2% for the year,” US Bhargav, general manager, retail banking, Punjab National Bank told ET.

The total deposit base of banks is also expected to increase by 16-17% for the year. According to banking analysts, as much as 25% of the total investments in various savings scheme, like monthly income schemes, post office savings schemes and national savings certificate, will be hit by the hike in the deposit rate.

“At least 25% of the prospective investment of small savings schemes will now flow into FDs over the next 8-10 months,” said a senior executive at Indian Bank. This could mean a whopping Rs 25,000 crore flow into the Indian banking system by way of FDs.

With Rs 3 lakh crore as the total deposits being added to the system every year, split equally between FDs and savings, this would mean that the FDs would rise to Rs 1,75,000 crore and the total would increase to Rs 3,25,000 crore.

“About Rs 25,000 crore, which would have been invested in alternate investments, is expected to flow into the banking system,” said Anup Bagchi, GM, ICICI Bank.

With the return on government securities increasing, the increased return on FDs is unlikely to effect the banks’ kitty.
“The impact of higher interest rate for FDs is unlikely to effect banks as the rate at which the return on government securities is increasing is faster than the rate at which the interest rates on deposits is increasing,” added Mr Bagchi.